22 June 2018

Make Social Impact Bonds tradeable

It’s
now thirty years since I first floated the idea Social Policy Bonds at a
meeting of the Australian Agricultural Economics Society in Blenheim, New
Zealand. My aim was to inject the market’s incentives and efficiencies into the
achievement of social and environmental outcomes. Under a Social Policy Bond
regime, bonds are issued on the free market for whatever price they will fetch.
The bonds would be backed by either government or the private
sector. They would not bear interest and would be redeemable for a fixed sum
only when a targeted social or environmental objective has been achieved and
sustained. The idea is that the holders of the bonds would form a coalition
whose over-arching goal is exactly that of society: to achieve the targeted
goal as quickly as possible.

If this sounds familiar, it’s because my work led to the creation of
Social Impact Bonds of which about 60, involving investments of more than $200m,
have been launched in 15 countries, aimed at meeting various social challenges.
There are 32 in the UK alone, with such goals as reducing recidivism rates and
housing rough sleepers in London.

There’s one important feature, though, about my original idea that
differentiates it from Social Impact Bonds: my intention has always been that the
bonds be tradeable, whereas SIBs, also known as ‘Pay for Success’ bonds, are not. This is, in fact, a critical difference, and it is
one that makes me ambivalent about SIBs (with which I’ve had no involvement). I
believe their lack of tradeability limits the usefulness of SIBs in several
ways.

Most
importantly, it means they can tackle only short-term problems. Investors will buy
the bonds only if they expect to profit from them. Because SIBs are not
tradeable, people will have to hold them to redemption to make a profit. That
in turn means that would-be investors would want any targeted goal to have a
realistic chance of being achieved within their time horizon, which might be
quite short, and certainly within their lifetime. This narrows the scope of the
goals we can target and, indeed, SIBs have invariably narrow goals. Because
their goals are so limited, so too are the opportunities for shifting resources
to and from different approaches to solving a particular problem, and varying
them as circumstances change. With a short payback period, investors in SIBs
have no incentive to research and experiment with innovative approaches that
have anything other the shortest lead time or are otherwise almost risk free.

Another
important reason why the bonds should be tradeable, is because the identity and
composition of the groups best placed to achieve a targeted objective will
change over time. Our most urgent and challenging social and environmental problems
will require multiple steps before they are solved. The people who are best at
step one will not necessarily be those who are best at step two and all
subsequent steps. We cannot even specify in advance what step one, or indeed
any step, will entail; still less can we identify those best placed to take these
steps. Tradeability means there be a market for Social Policy Bonds, which will
ensure that the bonds will find their way into the hands of the highest bidders
for them – who will be the best-placed to advance progress towards society’s
targeted goal most efficiently. When the bonds are not tradeable, then we have
something similar to the the way social policy is currently implemented:
government identifies some organisation (most likely an existing body, often
one of its myriad own agencies), and pumps money into it. If this agency is
paid for performance (as in Social Impact Bonds), it has an incentive to
perform well. This might be an improvement on the way things are usually done.
But if, as so often, one or all of the steps necessary to resolve the targeted
problem optimally lie beyond the imagination or competence of such a designated
agency, then we are going to be stuck with current (woeful) levels of
under-achievement in social and environmental policy.

Social
Policy Bonds have the advantage in that they not only do not stipulate how society's goals are to be achieved, nor
who shall achieve them. They will
leave those decisions to the market, which will favour the most cost-effective coalition
of operators at every stage on the way to achieving social goals.

Another
advantage of the bonds being tradeable is that a market for the bonds would
generate extremely useful information both for would-be investors and for
policymakers. The value of the bonds will rise and fall depending on whether
the market thinks the targeted goal will be achieved more or less quickly.
These prices, and their changes, will be immensely valuable to those having to
decide where to allocate society’s scarce resources, be they in the public or
private sector.

One
of the problems with SIBs is that, because their goals are relatively narrow,
the costs of monitoring progress toward or away from their achievement will
always be a higher proportion of the total administrative costs than they would
under a regime that could target broader goals. It's almost as easy (or not
much more difficult) to monitor national crime indicators, say, as to look at
the behaviour of group of a few hundred specific ex-prisoners in one part of
the country over several years.

And
it is to achieve these broader goals that my original idea was intended. Goals
such as improving the health of a population, eliminating poverty or achieving
universal literacy. Social Policy Bonds could target global goals too: the
ending of war, civil war, terrorism; the mitigation of climate change (or its
negative impacts) or any global environmental problem, such as loss of
biodiversity and preservation of the marine environment. These broad problems
require a long-term outlook well beyond the purview of investors in Social
Impact Bonds. To solve such problems, we shall need Social Policy Bonds which,
because of their tradeability, will encourage the exploration, refinement and
implementation of diverse, adaptive approaches.

Most
people would agree that humankind faces huge and urgent challenges, including war,
nuclear proliferation, climate change and poverty. Yet, while there is almost
universal consensus that these challenges need to be met, our politics is
crippled by venomous, divisive tribalism, obsessed by ideology and personality.
The gaps between policy and goals, and between people and politicians grow ever
wider. Social Policy Bonds, by injecting the market’s incentives into achieving
humanity’s long-term ideals could help close these gaps.

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Social Policy Bonds

See the Social Policy Bonds website for overviews and links to articles, papers, news and more about Social Policy Bonds. Click on the image in the panel below to download a 2400-word article published by the Institute of Economic Affairs, London.

Social Policy Bonds in 2400 words

Social Policy Bonds in the media

25 May 2018: a short article on Social Policy Bonds and their possible application in India, appears on Market Express (India). It is by Dr Ashok V Desai and titled Incentivizing welfare.

9 October 2015: An article by Greg Bearup on the genesis of the Social Policy Bond idea, and application of a version of it in Australia appears in the Weekend Australian Magazine. (The article can also be downloaded as a pdf from here.)

October 2013: Professor Robert Shiller of Yale University, is named as one of the three winners of the 2013 Nobel Prize in Economics. His Nobel Prize lecture (pdf) delivered on 8 December, mentions Social Policy Bonds. Professor Shiller has for many years encouraged my work on Social Policy Bonds, beginning in late 1996 when he sent me this letter.

3 May 2012: An audio talk by Nobel Prize winner Professor Robert Shiller at the London School of Economics, in which Social Policy Bonds are briefly mentioned, is available here.